While we will admit we weren't too early to the gold trade, we are full-fledged gold bulls. Unlike those before us, we got interested in gold as a monetary asset only after experiencing the dislocation and policy responses in the aftermath of the credit crisis. Prior to 2008, we truly did not see the value in an asset that yielded nothing. Frankly, prior to the crisis we did not respect the political and social views that many of the ardent gold bugs shared.

Our interest in gold started after we started thinking about the monetary and fiscal policy responses that came out of the credit crisis. Elected officials in the U.S. touted costly stimulus packages, while the central banks expanded its balance sheet to shore up the banking system. All responses hinged on increasing liabilities or printing money.

Click to enlarge

Click to enlarge

Closing of the Gold Window

In 1971, President Nixon closed the gold window, effectively delinking the dollar from gold. We started to think about credit expansion post 1971. The graph below outlines total credit market debt owed. Credit market expansion goes virtually exponential after the early 1970s.

Click to enlarge

Click to enlarge

Gold is Far From a "Bubble" and is an Under Owned Asset

Click to enlarge

Click to enlarge

As opposed to the housing or tech bubbles, that experience strong participation, the participation rate in gold remains low. During the housing bubble years homeownership soared from a 30 year average of 64% to a bubble level 69%. This ownership rates does not take into account the vast number of people who purchased second and third homes.

Click to enlarge

Click to enlarge

Gold reserves to the money supply remains low due to the expansion of the money supply. Gold experienced a true bubble in 1980, when gold reserves as a percentage of the money supply peaked at 140%. Today, reserves are approximately 20% of the money supply.

Gold Bulls are in Good Company

As we formulated our gold thesis we educated ourselves by analyzing the theses of prominent fund managers that had large gold positions.

Click to enlarge

Click to enlarge

Our view is that we are in good company with these professional gold bulls. These gold bulls know history, and we believe they have done the requisite work to formulate their thesis. We have read notes and letters and listen to the speeches from our professional gold bulls. The thesis is smart and well articulated. We advise readers to do the same.

Federal Reserve is Concerned with Deflation

Our current Federal Reserve chairman, Ben Bernanke is a student of the Great Depression. We believe that Bernanke will do everything he can to fight deflation and a threat of a depression, and that means money printing. Until there is a change within the view point of central bankers, we will remain long gold.

Beggar Thy Neighbor Monetary Policy to Boost Exports

As the global economy remains weak due to the over indebted developed world balance sheets, sovereigns are fighting for a stagnant or shrinking pie of global demand. President Obama has indicated that he would like to double exports within the next 10 years. One of the primary ways for a developed nation to double exports is to weaken its currency. Japan and Switzerland are two nations that are focused on stabilizing their strong currencies.

Power of the Internet

We believe that the ability of the Internet to spread knowledge and educate people about the idea of gold might be enough to spark a real debate about linking money to gold or a basket of hard goods. Ben Davies of Hinde Capital does a great job of outlining the thesis in Singularity – Transcendent Money. Gold is not advocated by the mainstream managers, thus individual investors have to seek this information out for themselves. We believe the power of the Internet is helping distribute the gold thesis.

Central Banks Value Gold

The so-called authorities of money-- world central bankers-- value gold. If gold was not valuable or had no place in the world monetary system, why would central bankers not sell more of their gold into the market? World central banks continue to hold gold. U.S. gold is held in secure locations at Fort Knox and under the Federal Reserve’s Bank of New York. During the European crisis, German central bankers were in fervent opposition of pledging German gold to the European Central Bank as collateral for bailout funds.

Tactical Strategy

We own gold and silver in physical and ETF forms (GLD and SLV). We follow a policy of not timing the market, but slowly accumulating these metals, as they are our insurance policy against inflation. Investors interested in vehicles that retain physical metal should look into Sprott Asset Management’s Sprott Physical Gold Trust (NYSEARCA:PHYS) and Sprott Physical Silver Trust (NYSEARCA:PSLV).